AIG’s 13-Year Wait Gets Longer as Modi Rebuffed: Corporate India

Pedestrians pass a roadworks site during the morning rush hour in Mumbai. India needs about $290 billion by 2017 for public works to upgrade its infrastructure according to estimates by the nation’s Planning Commission. Photographer: Vivek Prakash/Bloomberg

Aug. 14 (Bloomberg) -- American International Group Inc.
waited 13 years in India to raise its stake in a local venture
from a maximum allowed 26 percent. That wait just got longer.

Opposition lawmakers, during the parliament session ending
today, scuppered Prime Minister Narendra Modi’s attempt to
revive a bill proposing a higher cap of 49 percent, dealing a
blow to his campaign pledge to open the $1.8 trillion economy.
The delay in the legislation, pending since 2008, is hampering
the expansion plans of insurers including AIG, Standard Life Plc
and MetLife Inc.

“We have been waiting for more than a decade for this
bill,” said Kaushal K Mishra, chief executive officer at Tata
AIG General Insurance, the New York-based insurer’s partnership
in India. “It is still not clear when the bill will be passed
and in what form it will be. Many large international insurers
are waiting for clarity on this.”

AIG is among the companies that see promise in the second-most populous country where insurance penetration, or premiums
underwritten as a proportion of a country’s total economic
output, is less than the global average of 6.5 percent. The
delay robs Modi, who needs insurers’ funds to meet his
infrastructure overhaul goals, of an opportunity to lure
investors during a proposed visit to the U.S. next month.

Sent to Panel

Finance Minister Arun Jaitley today sent the bill to a 15-member select committee, which will submit a report in the next
session of parliament.

Modi’s failure to see the bill through has raised doubts
among investors over his ability to take politically sensitive
decisions, said N. Bhaskara Rao, chairman of the New Delhi-based Centre for Media Studies. His government has also
announced plans to revamp pension, land and labor policy, as
well as start a uniform goods and service tax -- all of which
require parliamentary approval.

“This just adds to the disappointment that the government
is not moving fast despite getting a strong mandate,” Rao said.
“Such instances reinforce the feeling especially in the
investor community.”

The rupee has weakened about 1 percent against the dollar
since Jaitley presented the budget on July 10. The benchmark S&P
BSE Sensex has slipped 0.6 percent from a record high reached on
July 24, according to data compiled by Bloomberg.

Role Reversal

Efforts by former prime minister Manmohan Singh’s
government to raise the investment cap were thwarted by rival
political parties, including Modi’s BJP and the Communists, who
argued that it isn’t in the interest of the Indian insurance
industry.

The main opposition Congress party that originally
introduced the legislation about six years ago, in a tit-for-tat
role reversal, is now against it after losing to Modi in the
elections in May. The BJP lacks a majority in the upper house of
parliament, the Rajya Sabha, where the proposal has stalled.

The clash is hurting the economy, said Prasun Gajri, chief
investment officer of HDFC Standard Life Insurance Co., the
Mumbai-based partnership of the Edinburgh-based insurer.

“A robust insurance sector will increase financial savings
and help in mobilizing the much needed long-term funds for
infrastructure development,” he said. “Growth in this segment
will support the economy’s expansion.”

Poor Infrastructure

India needs about $290 billion by 2017 for public works to
upgrade its infrastructure according to estimates by the
nation’s Planning Commission. The poor quality of roads,
bridges, ports, rail and other facilities, ranked below those in
Guatemala and Namibia in a World Economic Forum survey, is
hindering an economy that expanded 4.7 percent in the year ended
March, near the slowest pace in a decade.

Insurers typically invest in long-term government and
corporate bonds, a crucial source of funds used to finance
infrastructure projects. Indian insurance companies, most of
which are state-controlled, held about 20 percent of government
securities as of end-2013, according to data provided by the
finance ministry.

Asia’s third-largest economy had 24 life insurance
companies and 28 non-life insurers by end-July, according to the
Insurance Regulatory and Development Authority. Twenty life
insurers and 17 non-life insurers had received foreign
investments as of March 2013, IRDA data shows.

Controlling Stake

“Most international companies will probably increase their
stake in Indian ventures,” T R Ramachandran, CEO of Aviva Life
Insurance Co. India said by phone from New Delhi. “Passing the
insurance bill also frees up the regulator’s hands to reform the
sector.”

While a controlling stake is the goal for many foreign
insurers, the proposed 49 percent is still better than the
current 26 percent, according to Vishal Narnolia, Mumbai-based
banking analyst at SMC Global Securities Ltd.

“Lack of head room to hold a more significant share in the
Indian joint venture and problems that they were facing in home
markets forced some large overseas insurers to exit India,”
said Narnolia.

Australia’s AMP Ltd. sold its holdings in a local venture
to billionaire Anil Ambani-controlled Reliance Capital Ltd. in
2005. AMP’s then chief executive officer Andrew Mohl said the
venture was “several years” from being profitable.

Rising Demand

New York Life Insurance Co. quit an Indian joint venture in
2012, three years after its local partner Max India Ltd.
indicated it would sell its 23 percent holdings to the biggest
U.S. life insurer owned by policyholders, should India change
its foreign direct investment rules.

Companies including Aviva Plc and Nippon Life Insurance Co
have stayed put in the South Asian country. They are betting
demand for pension, health and other protection products will
increase with higher per capita income, rising average life
expectancy, the emergence of nuclear families as well as a
reduction in the average size of households, Charles Graham, an
analyst with Bloomberg Intelligence, wrote in a research note
dated July 14.

India’s insurance sector is “investment starved,” Jaitley
said while presenting his budget that proposed raising the
limit.

Insurance penetration in India has slipped every year from
5.2 percent in 2009 to 3.96 percent in 2012, the latest data
provided by IRDA show. That is still the highest among the BRIC
nations.

India requires as much as 600 billion rupees ($9.8 billion)
in insurance till 2019 to sustain its growth trajectory, said
Monish Shah, a Mumbai-based senior director at the local unit of
Deloitte Touche Tohmatsu.

“India presents a huge opportunity and this was a good
time to raise the limits and bring in the foreign investors,”
Shah said. “Any uncertainty on such policy matters is going to
adversely affect investor confidence.”